Revisiting The Relationship Between Competition And Price Dispersion

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Using granular data covering price and booking information of flights in China, we test the theory that predicts how the competition will affect price dispersion. We complement the past price dispersion studies by making two contributions: First, we accurately identify and isolate three types of price dispersion originating from either third-degree price discrimination or peak-lead pricing. Second, we test the relative contribution of industry-elasticity and cross-price elasticity to price dispersion. Results suggest that both cross-price elasticity and industry-elasticity are crucial in determining the relationship between price dispersion and competition. Competition matters only when industry-elasticity is relatively low. And people’s preferences differ to a greater extent in purchase timing and departure date than in slot, which will affect how the three types of price dispersion respond to competition.